Moody’s Corp. (MCO) is scheduled to release its second quarter 2011 results ahead of the opening bell on Wednesday, July 27, 2011.
Prior Quarter Recap
Moody’s first quarter results surpassed the Zacks Consensus Estimates on both the top and bottom lines. Earnings were up 42.3% year on year and revenues gained 21.1% from the prior-year quarter.
Strong top-line growth across all segments primarily accounted for the positive surprise. Moody's Business Analytics (MA) and Moody's Investor Services (MIS) segments were the primary growth drivers in the reported quarter.
Based on the strong results, Moody’s revised its full-year guidance, projecting higher revenues from most of its operational segments.
For the full story please read: Moody’s Reports Excellent 1Q
2011 Expectations
Based on better-than-expected first quarter results, Moody’s revised its fiscal 2011 guidance. For fiscal 2011, Moody’s expects revenues to increase in the low-double-digit percent range (previous guidance high-single-digit percent range). However, expenses are expected to increase in the mid- to high-single-digit percent range.
Management expects fiscal 2011 operating margin to be in the range of 38% to 40% and the effective tax rate to be approximately 36.0%.
Management intends to continue with its share repurchase program in 2011, subject to available cash flow and other capital allocation decisions.
The company expects diluted earnings per share for fiscal 2011 in the range of $2.22 to $2.32 (previous guidance was $2.12 to $2.22). Currently, the Zacks Consensus Estimate is pegged at $2.35 for the fiscal year.
Segment wise, for the global MIS business, revenue is expected to increase in the low-double-digit percent range (previous guidance mid- to high-single-digit percent range) for fiscal 2011. Domestic MIS revenue is expected to increase in the mid-single-digit percent range, while overseas revenue is expected to increase in the mid- to high-teens percent range (previous guidance low-double-digit percent range).
Corporate finance revenue is anticipated to increase in the high-teens percent range. Structured finance revenue is expected to grow in mid-single-digit percent range.
Revenue from financial institutions is expected to grow in the high-single-digit percent range, while public, project and infrastructure finance revenue is estimated to increase in the mid-single-digit percent range.
MA revenue is likely to increase in the high-single- to low-double-digit percent range for fiscal 2011. MA revenue is expected to increase in the high-single-digit percent range in the U.S. and in the low-double-digit percent range outside the U.S.
Revenue growth is expected in the mid-single-digit percent range for Research, Data and Analytics and in the low- to mid-single-digit percent range for Risk Management software. Professional services revenue is expected to double, driven by revenue generated from the newly acquired CSI Global Education.
Zacks Consensus Estimate for 2Q11
The Zacks Consensus Estimate for the second quarter of 2011 implies a 14.9% sequential decline in earnings to 57 cents per share. Total revenue as per the Zacks Consensus Estimate is $540 million, down 6.4% from the revenues earned in the prior quarter.
For the current quarter, out of the five analysts covering the stock, two analysts lowered their estimates, while one analyst made an upward revision in the last thirty days.
Analysts covering the stock expect slower capital market activity to be a headwind for the quarter due to weakness in some domestic economic reports and turmoil in selected international regions. Additionally, with revenues on the declining side on a sequential basis, analysts expect the earnings to be tepid for the quarter.
We note that Moody’s Corp. has consistently exceeded estimates over the past year or so. The average surprise in the preceding 4 quarters is a positive 21.88%. Thus, we expect another positive earnings surprise.
Recommendation
We maintain our Outperform rating over the long term. We expect Moody’s to benefit from the gradual recovery in the U.S. economy, with the Investor Service and Analytics business delivering strong top-line results over the long term.
Moreover, lower operating expense and higher share repurchases will improve profitability going forward.
The company faces tough competition from Dun & Bradstreet Corp. (DNB) and privately held Fitch Ratings Inc.
Currently, Moody’s has a Zacks #4 Rank, which implies a Sell rating in the short term (1-3 months).
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